Take profits on Beazley, Jefferies says

Investors should take profits on Beazley shares, Jefferies argued as the broker downgraded the Lloyd's of London insurer to 'hold'.

After Beazley's first-half profit beat expectations the market is now too optimistic about improvements in underwriting profitability, Jefferies analyst Philip Kett wrote in a note to investors.

Unless 2020 is an unusually mild year for catastrophes reserve releases will not be enough to meet market expectations for improving combined ratios over the next couple of years, Kett wrote. He cut his rating on the insurer's shares to 'hold' from 'buy' and trimmed his price target to 611p from 616p.

"After a surprisingly euphoric reaction to last week's results … Beazley's shares now appear fairly valued to us," Kett said. He said the market's valuation of the company at 16.9 times 2019 earnings and 16.5 times 2020 consensus forecasts was fair.

The analyst said Beazley remained as disciplined as ever when it came to reserves. At worst the group should be protected from claims inflation offsetting rate rises and at best there could be high reserve releases in three-to-five years' time.

"We expect Beazley to remain cautious until there is more clarity over the cost of issues such as social inflation, in part explaining our more cautious earnings forecasts relative to consensus," Kett said.

Kett also noted that the Lloyd's market had not had a good start to 2020 because of the coronavirus epidemic in Asia. He said Beazley had highlighted exposure through its contingency book. Though losses are capped by reinsurance to $25m (£19m) the limit may at least have been reached following the scrapping of the Chinese Grand Prix and other events, he said.